Howard Gold's No-Nonsense Investing

Colleges must do more to rein in student debt

Commentary: Poor job prospects are just the start of financial woes

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NEW YORK (MarketWatch) — For the last couple of weeks, we’ve seen college seniors don cap and gown, march to the sounds of “Pomp and Circumstance” and collect their diplomas, the fruit of years of work and sacrifice.

Parents and siblings, friends and family looked on in joy, shooting videos to capture one of the great passages in American family life.

Graduates from Columbia University's Columbia College cheer during the university's commencement ceremony in New York, May 16.

Reuters

Now comes the hard part.

These students are graduating into a world of pain. Unemployment among 22- to 26-year-olds is 8.9% — though, if it’s any consolation, it’s over 20% among people of the same age with only a high school diploma.

And although the job market for college grads has improved a bit, it’s still very rough out there.

Meanwhile, many of these grads have an even bigger sword of Damocles hanging over their heads: student debt.

There are currently over $1 trillion in student loans outstanding, more than total outstanding auto or credit card loans, wrote billionaire Mark Cuban on his blog.

About two-thirds of college graduates now carry debt versus less than half in 1992. The average debt load is $23,300.

But 10% of four-year graduates owe $50,000 and more — and that doesn’t include any postgraduate training, like law, business or medical school, which could easily push the total into six figures.

And the tough job market is causing more and more grads to fall behind in their payments — more than 20%, according to a recent cover story in Barron’s.

Meanwhile, it takes borrowers longer and longer to pay off their debt, with people still owing substantial sums well into their 30s or even their 40s.

This could have a major impact on the economy, depressing consumer spending and keeping a whole generation out of the markets.

Blame game

I’d first blame colleges, which have been unable to control costs but have instead engaged in a pricey “arms race” to grab high rankings and attract students.

Then I’d put some, but not most, of the blame on the government — the federal government for subsidizing a lot of the debt (for-profit colleges get 90% of their revenues from government-backed loans) and the states for cutting aid to public institutions, forcing them to raise tuition or fees dramatically.

And finally there are the parents and students themselves for either not doing their homework or deluding themselves that they’ll easily handle the onerous debt they’ll face within months after graduation.

For years, college costs have risen much faster than inflation — 181% at private nonprofit institutions between 1981-82 and 2011-2012 and 268% in public four-year colleges and universities during the same period.

Tuition alone has risen 300% since 1990 (or 7% annualized), four times the rate of inflation, Barron’s reported.

Students at Columbia University, the most expensive private college, according to U.S. News, had to fork over more than $45,000 in tuition and fees in 2011-2012. And that does not include books, room and board, or other expenses.

But even non-elite private colleges like Fairfield University charge over $50,000 a year altogether. That’s more than the average annual income in the U.S., which was $47,000 last year.

Faculty costs not the issue

How did this happen?

Faculty salaries were not the culprit. Colleges and universities haven’t added many tenured professors, but have substituted lower-paid adjuncts and graduate students.

Administrative costs, however, have ballooned: The number of full-time administrators for each 100 students at America’s leading universities grew by 39% between 1993 and 2007, more than twice as fast as those engaged in teaching or research, according to the Goldwater Institute, a conservative think tank based in Arizona.

“Universities are suffering from ‘administrative bloat,’ expanding the resources devoted to administration significantly faster than spending on instruction, research and service,” its report said.

Another study from the Delta Cost Project showed operations and maintenance costs grew fastest over the last 10 years, followed by research and student services.

Jane Wellman, one of the authors of that study, told me in an email that roughly half of all education-related spending by colleges and universities “go to pay for something other than faculty.”

Student services, for instance, include admissions and financial aid officers, career counselors, librarians, and computer technicians — “not exactly ‘bureaucrats,’ but also not teachers or researchers,” Wellman wrote.

This is where the hubris of colleges and universities comes in. Some of these student services include plush student centers, climbing walls and other silly amenities that colleges have added to “stay competitive.”

Ratings like those of U.S. News also have had a baleful influence as second-tier institutions spent heavily to move up the ranks and attract better students. This is a bizarre market that, unlike the real economy, has been price-insensitive. Kind of like health care — except college costs have risen twice as fast.

David Warren, president of the National Association of Independent Colleges and Universities, a Washington-based trade association and lobbying organization, told me that net tuition and fees — after grants and adjusted for inflation — at private institutions had actually fallen 4.1% in the last five years.

Costs at public universities, however, have continued to rise, as institutions have hiked tuitions and fees to cover budget cuts by financially strapped state governments.

Warren said private colleges were banding together in consortia, much like boutique hotels, to buy goods and services in bulk and cut costs. It’s about time.

But it doesn’t help graduates who are deep in debt with limited job prospects ahead.

Warren told me that each student who takes out a loan is by law counseled twice and given a full disclosure of what his or her obligations will be.

But something’s not getting through. Either these disclosures are too confusing or colleges need to make user-friendly loan calculators available or maybe people need to get the kind of “good faith estimates” mortgage borrowers get and then swear on their lives that they understand.

Thinking it through

Has anybody talked to an 18-year old lately? They’re a lot smarter than I was at that age, but they typically have their heads in the clouds, to put it politely.

So, it’s up to the parents to administer tough love. But how many parents can say “no” to their children’s hopes and dreams and insist on a more affordable state or community college?

Or maybe some of these borrowers took out loans in 2007-2008 when housing prices could never fall and a college degree was a ticket to a bright future.

A college education has become one of the twin pillars of the American dream. A home of one’s own is, of course, the other.

And just as some people bought McMansions when they could afford only a three-bedroom ranch house, so many students have gotten in over their heads in debt.

But if enough parents got together and demanded colleges cut costs — and stuck to their guns about it — maybe these institutions would find ways to cut expenses that seemed like necessities just a few years ago.

This looks like one of the few areas where the Tea Party and Occupy Wall Street could find common ground.

Howard R. Gold is a columnist at MarketWatch and editor at large for MoneyShow.com. You can follow him on Twitter @howardrgold and catch his commentary on the economy and the 2012 campaign at www.independentagenda.com.

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If Blue America wants public health insurance and Red America doesn't, why should one of them end up denied? We could apply this principle all sorts of other areas of government activity, from taxes and spending to education.

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